"The Super Project business case"

Strategic concerns can include any issues that might affect the acceptance decision that you have presented. They may consist of concerns that are difficult to quantify. You can also use a strategic concerns section to present information or evidence that might cause to to qualify or change your decision.

		NY 1292-C 10-64											____________________
		PTD. In U.S.A.											Date
		Jell-O	St. Louis			The Super Project				67-89			____________________
		Division	Location			Project Title				Project No.			Supplement No.
	Project Request Detail		1st Per.	2nd Per.	___ Per.	___ Per.	___ Per.		Return on New Funds Employed10-Yr. Avg.
	1.	Land	$									PAT (C A)		PBT (B A)
	2.	Buildings	80						A - New Funds Employed (Line 21)			$380		$380
	3.	Machinery & Equipment	120						B - Profit Before Taxes (Line 35)					$239
	4.	Engineering							C - Net Profit (Line 37)			$115
	5.	Other (Explain)							D - Calculated Return			30.2%		62.0%
	6.	Expense Portion (Before Tax)
	7.	Sub Total	$200						PayBack Years From Operational Date
	8.	Less: Salvage Value (Old Asset)							Part Year Calculation for First Period					- Yrs.
	9.	Total Project Cost*	$200						Number of Full Years to Pay Back					6.00 Yrs.
	10.	Less: Taxes on Exp. Portion							Part Year Calculation for Last Period					0.83 Yrs.
	11.	Net Project Cost	$200						Total Years to Pay Back					6.83 Yrs.
	*Same as Project Request
			1st Per.	2nd Per.	3rd Per.	4th Per.	5th Per.	6th Per.		7th Per.	8th Per.	9th Per.	10th Per.	11th. Per.	10-Yr.
	Funds Employed		F 68	F 69	F 70	F 71	F 72	F 73		F 74	F 75	F 76	F 77	_____	Avg.
	12.	Net Project Cost (Line 11)	$200	200	200	200	200	200		200	200	200	200
	13.	Deduct Depreciation (Cum.)	19	37	54	70	85	98		110	121	131	140
	14.	Capital Funds Employed	$181	163	146	130	115	102		90	79	69	60		113
	15.	Cash
	16.	Receivables	124	134	142	157	160	160		169	169	178	178		157
	17.	Inventories	207	222	237	251	266	266		281	281	296	296		260
	18.	Prepaid & Deferred Exp.
	19.	Less Current Liabilities	(2)	(82)	(108)	(138)	(185)	(184)		(195)	(195)	(207)	(207)		(150)
	20.	Total Working Funds (15 Thru 19)	329	274	271	264	241	242		255	255	267	267		267
	21.	Total New Funds Employed (14 + 20)	$510	437	417	394	356	344		345	334	336	327		380
	Profit And Loss
	22.	Unit Volume (in thousands)	1100	1200	1300	1400	1500	1500		1600	1600	1700	1700		1460
	23.	Gross Sales	$2,200	2400	2600	2800	3000	3000		3200	3200	3400	3400		2920
	24.	Deductions	88	96	104	112	120	120		128	128	136	136		117
	25.	Net Sales	2112	2304	2496	2688	2880	2880		3072	3072	3264	3264		2803
	26.	Cost of Goods Sold	1100	1200	1300	1400	1500	1500		1600	1600	1700	1700		1460
	27.	Gross Profit	1012	1104	1196	1288	1380	1380		1472	1472	1564	1564		1343
		Gross Profit % Net Sales
	28.	Advertising Expense	1100	1050	1000	900	700	700		730	730	750	750		841
	29.	Selling Expense
	30.	Gen. and Admin. Cost
	31.	Research Expense
	32.	Start-Up Costs	15												2
	33.	Other (Explain) Test Mkt.	360												36
	34.	Adjustments (Explain) Erosion	180	200	210	220	230	230		240	240	250	250		225
	35.	Profit Before Taxes	($643)	(146)	(14)	168	450	450		502	502	564	564		239
	36.	Taxes	(334)	(76)	(7)	87	234	234		261	261	293	293		125
	36A.	Add: Investment Credit	(1)	(1)	(1)	(1)	(1)	(1)		(1)	(1)	-	-		(1)
	37.	Net Profit	(308)	(69)	(6)	82	217	217		242	242	271	271		115
	38.	Cumulative Net Profit	($308)	(377)	(383)	(301)	(84)	133		375	617	888	1159
	39.	New Funds to Repay (21 Less 38)	$818	814	800	695	440	211		(30)	(283)	(552)	(832)

General Foods was organized along product lines in the United States, with foreign operations under a separate division. Major U.S. product divisions included Post, Kool-Aid, Maxwell House, Jell-O, and Birds Eye. Financial data for General Foods are given in Exhibits 1, 2, and 3. The $200,000 capital investment project request for Super involved $80,000 for building modifications and $120,000 for machinery and equipment. Modifications would be made to an existing building, where Jell-O was manufactured. Since available capacity of a Jell-O agglomerator would be used in the manufacture of Super, no cost for the key machine was included in the project. The $120,000 machinery and equipment item represented packaging machinery.

		Change From Aug.-Sept. 1965
	Aug.-Sept.1966	Share Points	Volume (%)
Jell-O	19.0%	3.6	40.0
Tasty	4.0	4.0	(new)
Total powders	25.3	7.6	62.0
Pie fillings and cake mixes	32.0	-3.9	(no change)
Ice cream	42.7	-3.4	5.0
Total market	100.0%		13.0

The Market A Nielsen survey indicated that powdered desserts constituted a significant and growing segment of the total dessert market, as shown in Table A. On the basis of test market experience, General Foods expected Super to capture a 10% share of the total dessert market. Eighty percent of this expected Super volume would come from growth in total market share or growth in the powders segment, and 20% would come from erosion of Jell-O sales. Production Facilities Test market volume was packaged on an existing line, inadequate to handle long-run requirements. Filling and packaging equipment to be purchased had a capacity of 1.9 million units on a two-shift, five-day workweek basis. This represented considerable excess capacity, since 1968 requirements were expected to reach 1.1 million units, and the national potential was regarded as 1.6 million units. However, the extra capacity resulted from purchasing standard equipment, and a more economical alternative did not exist. Capital Budgeting Procedure The General Foods Accounting and Financial Manual identified four categories of capital investment project proposals: (1) safety and convenience; (2) quality; (3) increase profit; and (4) other. Proposal procedures and criteria for accepting projects varied according to category (see Exhibit 4). In discussing these criteria, Sanberg noted that the payback and return guidelines were not used as cut-off measures and added: Payback and return on investment are rarely the only measure of acceptability. Criteria vary significantly by type of project. A relatively high return might be required for a new product in a new business category. On the other hand, a much lower return might be acceptable for a new product entry which represented a continuing effort to maintain leadership in an existing business by, for example, filling out the product line. Super fell into the third category, as a profit-increasing project. Estimates of payback and return on funds employed were required for each such project requiring $50,000 or more of new capital funds and expense before taxes. The payback period was the length of time required for the project to repay the investment from the date the project became operational. In calculating the repayment period, only incremental income and expenses related to the project were used. Return on funds employed (ROFE) was calculated by dividing 10-year average profit before taxes by the 10-year average funds employed. Funds employed included incremental net fixed assets plus or minus related working capital. Start-up costs and any profits or losses incurred before the project became operational were included in the first profit and loss period in the financial evaluation calculation. Capital Budgeting Atmosphere A General Foods accounting executive commented on the atmosphere within which capital projects were reviewed: Our problem is not one of capital rationing. Our problem is to find enough good solid projects to employ capital at an attractive return on investment. Of course, the rate of capital inputs must be balanced against a steady growth in earnings per share. The short-term impact

of capital investments is usually an increase in the capital base without an immediate realization of profit potential. This is particularly true in the case of new products. The food industry should show a continuous growth. A cyclical industry can afford to let its profits vary. We want to expand faster than the gross national product. The key to our capital budgeting is to integrate the plans of our eight divisions into a balanced company plan which meets our overall growth objectives. Most new products show a loss in the first two or three years, but our divisions are big enough to introduce new products without showing a loss. Documentation for the Super Project Exhibits 5 and 6 document the financial evaluation of the Super project. Exhibit 5 is the summary appropriation request prepared to justify the project to management and to secure managements authorization to expend funds on a capital project. Exhibit 6 presents the backup detail. Cost of the market test was included as Other expense in the first period because a new product had to pay for its test market expense, even though this might be a sunk cost at the time capital funds were requested. The Adjustments item represented erosion of the Jell-O market and was calculated by multiplying the volume of erosion times a variable profit contribution. In the preparation of this financial evaluation form, costs of acquiring packaging machinery were included but no cost was attributed to Jell-O agglomerator capacity to be used for the Super project because the General Foods Accounting and Financial Manual specified that capital project requests be prepared on an incremental basis: The incremental concept requires that project requests, profit projections, and fundsemployed statements include only items of income and expense and investment in assets which will be realized, incurred,